Economic loss doctrine did not bar power companies’ tort claims against turbine maker

The economic loss doctrine did not bar negligence, failure to warn, and other claims brought by two power companies against the manufacturer of a steam turbine that failed because their claims arose out of the manufacturer’s alleged tortious conduct rather than from a commercial sales contract, a Minnesota court of appeals ruled in reversing and remanding a trial court’s grant of summary judgment to the manufacturer (Northern States Power Company v. General Electric Company, July 17, 2017, Smith, T.).

A steam turbine in a coal-fired power-production unit assembled and manufactured by General Electric Company (GE) failed catastrophically as a result of a phenomenon called stress corrosion cracking (SCC), at the Sherburne County Generating Station (SHERCO), an electric generating facility. The unit was jointly owned by Southern Minnesota Municipal Power Agency (SMMPA) and Northern States Power Co. (NSP). As a result, SMMPA and NSP lost profits for two years and SHERCO had to purchase energy on the open market.

After the turbine failure, NSP and SMMPA brought a number of tort claims against GE, including those for fraudulent concealment, willful and wanton negligence, gross negligence, professional negligence, and post-sale failure to warn. NSP and SMMPA alleged that GE caused the damage by failing to disclose technical information or recommend time-based service inspections that would have reduced the likelihood of failure. When GE obtained a dismissal of all of the claims via summary judgment, NSP and SMMPA filed an appeal.

Economic-loss doctrine. The appellate court pointed out that the district court’s grant of summary judgment was grounded in the theory that the economic-loss doctrine bars recovery in tort for damages arising out of a commercial sales contract. The district court determined that the "predominant purpose" of the relationship between GE and the power companies was for the sale of goods, and that the sale was between two sophisticated parties and thus was a commercial transaction.

NSP and SMMPA argued that the economic-loss doctrine did not bar their claims because their losses arose not from a breach of the sales contract but rather from alleged tortious conduct independent of the sales contract. The power companies asserted that the district court erred by analyzing only whether the case involved a commercial sale of goods and failing to analyze whether appellants’ claims arose out of or were independent of the commercial sale-of-goods contract.

The appellate court agreed, and stated that the economic-loss doctrine barred recovery only if the damages suffered actually arose out of the contract. The court then noted that the power companies had argued that their tort claims arose not out of the sales contract but rather out of GE’s failure to advise them that they should conduct time-based inspections when GE learned that its contrary recommendations in prior GE-issued "technical information letters" (TILs) were imprudent or when they asked for clarification.

The court also noted that NSP and SMMPA were casting their claims in terms of GE’s voluntary assumption of duties post-sale. For example, in their reply brief, the power companies had written, "This lawsuit concerns GE’s voluntary assumption [of] responsibility for updating turbine technical information."

The court then pointed out that the sales contract did not provide for TILs or require GE to provide updated technical information, and thus any duty to provide that information was not found in the contract. GE argued that the sales contract nevertheless encompasses "the provision of technical information" generally because the contract stated that "instruction manuals" would be supplied at the time of shipment. An operations manual mentioned in the contract included a document which states that GE provides "[r]ecommendations to owners on specific matters" "by means of [TILs]." But that document is not a contract, the court said, and did not obligate GE to issue TILs or provide any other information.

The appellate court concluded that GE’s alleged tortious conduct was independent of the sales contract because the contract did not encompass any bargained-for obligation or allocation of liability related to post-sale advice.

Other claims. GE had asserted that the power companies could not establish any duty owed by GE outside the warranties and obligations of the sales contract. The appellate court said that the existence of a duty in tort goes to the merits of the tort claims, which it declined to address. It then remanded the matter to the district court to decide the remaining issues.

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